Compliance Blog

Written by Brandy Bruyere, Regulatory Compliance Counsel

Yesterday, the NCUA Board held its April meeting and included action on the following items:

• Share Insurance Quarterly Fund Review;
• Request from CME Federal Credit Union to Expand Its Community Charter
• Proposed Rule, Appendix B of Part 701, Associational Common Bond Requirements
• Final Rule, Part 702, Credit Union Capital Planning and Stress Testing

This blog will provide a brief overview of the last two items—the final rule on capital planning and stress testing, and the proposed rule on associational common bond requirements. For more information about the full agenda, check out NCUA’s Board Action Bulletin.

Capital Planning and Stress Testing

The final rule on capital planning and stress testing applies to “covered credit unions,” meaning credit unions with assets of $10 billion or more as of March 31^st of the current calendar year. To date, this means the rule will impact four credit unions, which will be required to have a capital policy that sets forth a planning and analysis process that is “consistent with the [credit union’s] financial condition, size, complexity, risk profile, scope of operations, and level of capital…”

In addition to a capital policy, covered credit unions must also develop and maintain a rather complex capital plan, which the credit union must then submit to NCUA by February 28^th of each year. The board of directors is tasked with reviewing the capital plan by assessing capital adequacy, addressing and remedying deficiencies in the process, and approving the capital plan. NCUA will either accept or reject the credit union’s capital plan within 90 days of receipt.

The final rule also subjects covered credit unions to annual stress testing requirements. The stress tests will analyze “all relevant exposures and activities of a credit union” in order to “evaluate [the credit union’s] ability to absorb losses” over a nine-quarter horizon. For the first three years, the results of stress tests will not be made public.

While only four credit unions are currently directly affected by the stress testing rule, this rule actually impacts all credit unions due to the costs of the program. NCUA will utilize independent modelers to conduct the stress tests, and pay for the expenses through the National Credit Union Share Insurance Fund. As NCUA estimates that each test will cost $1 million per year the first year and $500,000 each for every year after that, the costs seem to outweigh the benefits. As a result, NAFCU has advocated for lower-cost alternatives and expressed concerns to NCUA regarding the rule’s impact on share insurance funds that protect all credit unions. NAFCU will keep members up to date in coming weeks with a Final Regulation that summarizes the impacts of the rule.

Associational Common Bond Requirements

The Board approved a proposed rule relating to associational common bond requirements. The Board aims to streamline its requirements, including automatic approval of some kinds of groups such as religious organizations, alumni associations, and labor unions. However, the proposal also includes additional regulatory burdens that would negatively impact federal credit unions (FCUs).

First, the proposed rule includes a “threshold requirement” for reviewing applications to include an association in a FCU’s field of membership. This means that rather than focusing on whether or not an association is legitimate, NCUA’s first consideration would be to decide if the only reason the association was formed was “for the purpose of expanding credit union membership.” An application could be rejected for this reason alone without any further inquiry regarding the association.

If NCUA determines the application meets this threshold requirement, NCUA would then apply the totality of the circumstances test. While this seven-factor test is used today, the proposed rule would also add another criterion to the test—whether the association and the credit union operate with “corporate separateness.” NCUA will determine corporate separateness by reviewing several factors:

• The association and FCU’s business transactions, accounts, and records are not intermingled;
• Each observes formalities of separate corporate procedures;
• Each is financed as a separate entity;
• Each is held out to the public as a separate enterprise; and
• The association maintains a separate physical location that is not a P.O. box or premises that is owned or leased by the FCU.

NCUA noted that associational groups may be grandfathered, but that the agency will consider if there are any associations in a credit union’s field of membership that “need to be removed” because they “no longer meet the totality of the circumstances test.”

Interestingly, NCUA “does not believe the proposed requirements pertaining to associational common bond provisions will add a significant administration burden for FCUs.”  As with beauty, I suppose burden is also be in the eye of the beholder. We will keep you updated on this issue as it develops.

Palate Cleanser. After all this happy news, I’ll leave you with a picture I found pretty cute. Our friends visited with their three year old daughter, and she just had to compare her foot to Lemmy’s “foot.”